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Is a client contemplating the acquisition of a competitor? U.S. and foreign antitrust agencies have investigated and challenged mergers among competitors in high-tech industries in the past, and will continue doing so for the foreseeable future. These investigations generally have taken six to 12 months to resolve, cost thousands of dollars to defend and too often have concluded with substantial divestitures and other equally unpalatable remedies. To avoid a long, costly merger investigation, company management should consider carefully the antitrust implications of a transaction involving a competitor beforethey commit to the deal. Management should start with a very basic question: Why does it want to do the deal? Does the company need to broaden its product line by adding complementary products? Is the company looking to expand its installed base to support expensive research and development? If the transaction is reviewed by a regulatory agency, it will want to know why the company wants to do the deal. The deal will have a better chance of surviving regulatory review if the company can offer the agency a pro-competitive reason for doing it. Next, management might want to consider whether the transaction is of the type that is rarely approved by the federal antitrust agencies. Could the deal be characterized as a merger-to-monopoly? Will it reduce the number of competitors from three to two? If the answer to either of these questions is yes, one or more antitrust agencies at the very least will investigate the transaction. The ultimate result of an investigation will depend on a number of factors, including the likelihood of new entry, but the company is in for a protracted battle. Moreover, as antitrust agencies generally challenge 2-to-1 or 3-to-2 mergers, this is not a battle the company is likely to win unless the parties are willing to make significant concessions. What sacrifices is the company willing to make to get the deal approved by antitrust agencies? Will it spin out a business unit to a would-be competitor in what is tantamount to a bankruptcy sale? Will it license valuable technology to a would-be competitor for a mere pittance? Will it agree to make a weak competitor stronger by giving that competitor access to superior technology? Management should be prepared to make such concessions or worse still, be prepared to abandon the transaction after months of uncertainty and wrangling with a government agency. Another important consideration is how customers might react to the deal. Will they believe that the transaction will improve services or stimulate innovation? Will they fear price increases or a reduction in supply, quality or innovation? If a firm is considering the acquisition of a competitor in a concentrated market, there is a good chance that its customers will have an opportunity to share their views with a government antitrust agency. Similar to more than 60 other countries, the United States imposes merger notification requirements. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act), any acquisition of stock or assets — whether by merger, consolidation or a simple investment — is reportable to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice if the value of the transaction exceeds $50 million and certain other requirements are met. If a transaction is reportable, the parties must observe a waiting period during which either agency may contact the parties’ customers to determine whether the transaction warrants a full-scale investigation. Moreover, even if the transaction is not reportable under the HSR Act, disgruntled customers can and do contact antitrust agencies to complain about transactions involving competing suppliers. Regardless of how they learn about the transaction, antitrust agencies will talk to customers if they conclude that the transaction might warrant investigation. If customers oppose the deal, the likelihood of a full-scale investigation and challenge increases. If customers are neutral or at the very least do not oppose the transaction, the likelihood of an investigation or a challenge decreases. No company contemplating an acquisition can afford to underestimate the effect that customers can have on the regulatory review process. Management also should consider whether the transaction documents should address the risks associated with delay or a possible challenge on antitrust grounds. How far should the acquirer have to go to get antitrust clearance? Should it have to litigate? Should it have to make any sacrifice provided the deal gets done? If the parties anticipate an antitrust investigation, consider delineating each party’s obligations in the transaction documents. For example, a firm about to be acquired by a competitor in a transaction that is likely to be investigated by a government agency should consider whether it would be appropriate to seek a substantial break-up fee if the acquirer decides to abandon the transaction for antitrust reasons. Such a firm also should consider whether it would be appropriate to include a provision that would require the acquirer to use its “best efforts” to close the transaction. A firm contemplating a transaction with a competitor also should take steps to pro-actively manage antitrust risk. Such steps would include cautioning all personnel to be sensitive to antitrust issues when creating documents about the transaction. E-mails, handwritten notes, transcripts of analyst calls, financial reports, board presentations and other documents that discuss the competitive effects of the transaction all will be subject to review by federal antitrust agencies, if the transaction is reportable under the HSR Act. Even if the transaction is not reportable, these documents still may be subject to government scrutiny. Because documents can invite antitrust review, even where the transaction merits none, antitrust counsel should review documents related to the transaction before they are finalized. As that is not always practicable, personnel at minimum should be advised to write with the assumption that the government will review their documents and to guard against the creation of unnecessary and potentially damaging documents. Knowing when to create documents is equally important. If the transaction will generate cost-savings that will enable the merged entity to compete more effectively, managers should not wait until the parties are before an antitrust agency to start putting pen to paper. They should write about efficiencies and the other pro-competitive justifications of the deal as they are identified. The antitrust agencies will consider efficiencies when assessing the overall competitive effects of a transaction, but they will view with skepticism claims of efficiencies that first surface during the merger review process. Indeed, the agencies give efficiency claims little, if any, weight when they are based on documents prepared by consultants hired for the express purpose of getting antitrust approval. Firms considering a merger or acquisition involving a competitor should be advised to consider the possibility of the deal being investigated or challenged by U.S. and foreign antitrust agencies. They should understand the role that customers play in the regulatory review process. They also should be advised against creating needless and potentially damaging documents about the transaction. If an antitrust agency is likely to investigate the transaction, then company managers must be prepared for what may be a long, costly period of uncertainty and consider how such an investigation might affect their stock value, board, shareholders, employees, suppliers and customers. They must consider the concessions that might have to be made to get antitrust clearance, and how such concessions might affect the overall value of the transaction. In short, clients should be advised to consider the antitrust implications of their deals before they find themselves embroiled in a merger investigation. Denise L. Diaz is an associate at Wilson Sonsini Goodrich& Rosati, and a former trial attorney with the antitrust division of the U.S. Department of Justice. She is a member of the California, District of Columbia and Virginia bars and specializes in high-tech antitrust matters. E-mail her at [email protected].

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